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Guide to backdoor Roth IRAs

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  • avantiMD
    replied
    Hello,

    Thank you for the informative forum!  I have a question that may have been covered elsewhere, but not sure?

    1.) How do you calculate the pre-tax portion of a tIRA in order to roll over to a self 401K?

    I have a tIRA with a blend of approx. 80% pre-tax and 20% non-deductible contributions.  I would like to clean this up in order to perform a Roth conversion by rolling the pre-tax portion of my tIRA into a self-401K, then convert the remaining tIRA (non-deductible portion) to a Roth?

    I am not sure how to calculate the exact amount of the pre-tax portion in order to roll over to the 401K?

    Any insight would be greatly appreciated!

    Thank you!

     

     

    Leave a comment:


  • DMFA
    replied




    I currently have a traditional IRA which was funded in 2012 and currently worth $12K and a 401K.

     

    I no longer qualify for a tax deductible traditional IRA and wish to do a back door Roth IRA for 2017.

     

    My question is can I keep my traditional IRA which was previously funded and start a new non-tax deductible traditional IRA which I will then do a Roth IRA back door.

     

    The reason I ask is someone said that if you have a previous tax deductible traditional IRA, you have to roll all of that into the new backdoor Roth IRA.

     

    Thank you.

     

     
    Click to expand...


    No, not without it being double-taxed. It doesn't matter if there are different traditional IRAs for deducted and non-deducted.

    When you convert a pretax amount to Roth, the conversion is treated by the IRS as though it's coming equally from all pretax IRA money and accounts, whether it was deducted or not. This is called the "pro rata rule." The way to ensure nothing is double-taxed is to have zero in all pretax IRAs (traditional, SEP, SIMPLE) at end-of-year when the conversion is done; in this instance, 12/31/2017.

    So if you have $12,000 in pretax IRA that you don't convert by end of year, and then you make the $5,500 non-deducted contribution and convert to Roth, then 5500 ÷ (5500+12000) = 31.4% of the conversion will be taxed  despite your already having paid income tax on it That adds $1,729 to your taxable income, meaning it will cost you at least $450 or so to do.

    So, you can convert the whole thing and pay taxes on anything that hasn't been taxed, or roll the pretax money into a non-IRA pretax account like a 401(k) or 403(b). This is in addition to the non-deductible traditional contribution followed by the untaxed Roth conversion.

    Leave a comment:


  • JADDSMD
    replied
    I currently have a traditional IRA which was funded in 2012 and currently worth $12K and a 401K.

     

    I no longer qualify for a tax deductible traditional IRA and wish to do a back door Roth IRA for 2017.

     

    My question is can I keep my traditional IRA which was previously funded and start a new non-tax deductible traditional IRA which I will then do a Roth IRA back door.

     

    The reason I ask is someone said that if you have a previous tax deductible traditional IRA, you have to roll all of that into the new backdoor Roth IRA.

     

    Thank you.

     

     

    Leave a comment:


  • jfoxcpacfp
    replied








    One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that. 
    Click to expand…


    You can do them in the same calendar year, just not the same reporting year. For example –

    • You have until 10/15/17 to contribute to a SEP for 2016 but

    • You can open and contribute to a SOLO-k on 1/2/17 for the year 2017


    This would allow you to roll the SEP into the SOLO before 12/31/17 to do the backdoor Roth conversion for 2017. May not be able to do the SEP earlier in the year because your 2016 tax return is on extension for some reason and can’t get the total contribution calculated, for instance.
    Click to expand…


    Thank you!

    Quick question, my wife does not have any IRAs in her name as of 12/31/2016.  Is it too late to do a $5500 backdoor Roth IRA for 2016 for her?  I have not filed my 2016 taxes as of yet.  If its not too late, what steps should I take?  Anything special?
    Click to expand...


    @DMFA is spot on. If you want to understand the why of all of this, the article will really help (at least I think it will). Suggest you try it - even references the WCI post you dug up.

    Leave a comment:


  • RadMD
    replied













    One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that.
    Click to expand…


    You can do them in the same calendar year, just not the same reporting year. For example –

    • You have until 10/15/17 to contribute to a SEP for 2016 but

    • You can open and contribute to a SOLO-k on 1/2/17 for the year 2017


    This would allow you to roll the SEP into the SOLO before 12/31/17 to do the backdoor Roth conversion for 2017. May not be able to do the SEP earlier in the year because your 2016 tax return is on extension for some reason and can’t get the total contribution calculated, for instance.
    Click to expand…


    Thank you!

    Quick question, my wife does not have any IRAs in her name as of 12/31/2016.  Is it too late to do a $5500 backdoor Roth IRA for 2016 for her?  I have not filed my 2016 taxes as of yet.  If its not too late, what steps should I take?  Anything special?
    Click to expand…


    Has she filed hers yet, or are you joint? I imagine joint.

    No, not too late. You’ll make her $5,500 non-deductible traditional IRA contribution for 2016 and reflect it on her/your 2016 taxes (should have no effect of tax owed). This only serves to “establish the non-deducted basis” for 2016 via form 8606.

    For her/your 2017 taxes, it will show her $5,500 non-deductible contribution for 2017, and the conversion(s) of both years’ contributions totaling $11,000, none of which should be taxed.

    Both years’ contributions don’t have to be made on the same day or converted at the same time, but you can. Just make sure you specify that you’re making a contribution *for* tax year 2016.

    So:

    1. Open her a TIRA (easiest to do at the same institution as her Roth)

    2. Make her $5,500 non-deductible TIRA contribution *for* 2016

    3. File form 8606 for her for 2016 ($5,500 on lines 1,3,4,14 and zero all others, just documents the basis)

    4. Convert the $5,500 non-deductible TIRA money to Roth (don’t withhold taxes since there aren’t any)

    5. Consider making her 2017 backdoor Roth at the same time (you can convert both at once if you like)


    Click to expand...


     

    Thank you so much!  Yes, we are married, filing jointly.  Totally forgot all she has is her work 401k and no IRAs!

    Just found this in case anyone is interested (basically spells out what you just told me):  https://www.whitecoatinvestor.com/late-contributions-to-the-backdoor-roth-ira/

    Leave a comment:


  • DMFA
    replied










    One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that.
    Click to expand…


    You can do them in the same calendar year, just not the same reporting year. For example –

    • You have until 10/15/17 to contribute to a SEP for 2016 but

    • You can open and contribute to a SOLO-k on 1/2/17 for the year 2017


    This would allow you to roll the SEP into the SOLO before 12/31/17 to do the backdoor Roth conversion for 2017. May not be able to do the SEP earlier in the year because your 2016 tax return is on extension for some reason and can’t get the total contribution calculated, for instance.
    Click to expand…


    Thank you!

    Quick question, my wife does not have any IRAs in her name as of 12/31/2016.  Is it too late to do a $5500 backdoor Roth IRA for 2016 for her?  I have not filed my 2016 taxes as of yet.  If its not too late, what steps should I take?  Anything special?
    Click to expand...


    Has she filed hers yet, or are you joint? I imagine joint.

    No, not too late. You'll make her $5,500 non-deductible traditional IRA contribution for 2016 and reflect it on her/your 2016 taxes (should have no effect of tax owed). This only serves to "establish the non-deducted basis" for 2016 via form 8606.

    For her/your 2017 taxes, it will show her $5,500 non-deductible contribution for 2017, and the conversion(s) of both years' contributions totaling $11,000, none of which should be taxed.

    Both years' contributions don't have to be made on the same day or converted at the same time, but you can. Just make sure you specify that you're making a contribution *for* tax year 2016.

    So:

    1. Open her a TIRA (easiest to do at the same institution as her Roth)

    2. Make her $5,500 non-deductible TIRA contribution *for* 2016

    3. File form 8606 for her for 2016 ($5,500 on lines 1,3,4,14 and zero all others, just documents the basis)

    4. Convert the $5,500 non-deductible TIRA money to Roth (don't withhold taxes since there aren't any)

    5. Consider making her 2017 backdoor Roth at the same time (you can convert both at once if you like)

    Leave a comment:


  • RadMD
    replied





    One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that. 
    Click to expand…


    You can do them in the same calendar year, just not the same reporting year. For example –

    • You have until 10/15/17 to contribute to a SEP for 2016 but

    • You can open and contribute to a SOLO-k on 1/2/17 for the year 2017


    This would allow you to roll the SEP into the SOLO before 12/31/17 to do the backdoor Roth conversion for 2017. May not be able to do the SEP earlier in the year because your 2016 tax return is on extension for some reason and can’t get the total contribution calculated, for instance.
    Click to expand...


    Thank you!

    Quick question, my wife does not have any IRAs in her name as of 12/31/2016.  Is it too late to do a $5500 backdoor Roth IRA for 2016 for her?  I have not filed my 2016 taxes as of yet.  If its not too late, what steps should I take?  Anything special?

    Leave a comment:


  • jfoxcpacfp
    replied


    One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that.
    Click to expand...


    You can do them in the same calendar year, just not the same reporting year. For example -

    • You have until 10/15/17 to contribute to a SEP for 2016 but

    • You can open and contribute to a SOLO-k on 1/2/17 for the year 2017


    This would allow you to roll the SEP into the SOLO before 12/31/17 to do the backdoor Roth conversion for 2017. May not be able to do the SEP earlier in the year because your 2016 tax return is on extension for some reason and can't get the total contribution calculated, for instance.

    Leave a comment:


  • RadMD
    replied







    I am a little late to the game for the backdoor Roth IRA, but better late than never!  Love this site and all of the useful information.  A few questions:

    1)  I have funds in several IRAs, including a SEP-IRA (maxed out 53k each year).  What can I do now?  Am I at a cost disadvantage due to the pro rata rule to contribute for 2016?

    2)  Moving forward, I plan to move all IRAs into a solo 401k before 12/31/17 so that I may contribute $11,000 (for wife and I) into backdoor Roth for tax year 2017.  Should I do this asap, or does it matter when you contribute?

    3)  Is it best to contribute on January 1 of the tax year (and then convert on January 2)?
    Click to expand…



    1. No. It will create a non-deductible basis for 2016, but as long as the balance of all pretax IRAs is zero on 12/31 of the year of *conversion*, this should fly. You may consider keeping your non-deductible and deductible traditional balances in separate accounts, though, to facilitate rolling over pretax to 401(k) and converting already-taxed to Roth.

    2. No point in waiting, but the only day that matters is the last of the year of conversion (in this case, 12/31/2017), since that’s what shows on form 5498 and is used for figuring taxable amounts for Roth conversions. One does not have to precede the other this year, but I don’t think you can do SEP and 401(k) contributions in the same year – check my work on that.

    3. Banks are closed on New Year’s Day, lol…but yes, no point in waiting. Contribute the max ($5,500 to each acct, or $6,500 of age 50+) on Jan 2 and do the Roth conversion as soon as the funds clear. It is exceedingly unlikely you’ll earn anything in your sweep account in that short period to make anything taxable. “Time in” > “timing” imo. As an aside, choose a custodian that won’t close the account when it goes back to zero to keep things easy. Fido and VG both don’t close them, and their process takes like 5 min tops.


    Click to expand...


    Awesome info!

    Leave a comment:


  • DMFA
    replied




    I am a little late to the game for the backdoor Roth IRA, but better late than never!  Love this site and all of the useful information.  A few questions:

    1)  I have funds in several IRAs, including a SEP-IRA (maxed out 53k each year).  What can I do now?  Am I at a cost disadvantage due to the pro rata rule to contribute for 2016?

    2)  Moving forward, I plan to move all IRAs into a solo 401k before 12/31/17 so that I may contribute $11,000 (for wife and I) into backdoor Roth for tax year 2017.  Should I do this asap, or does it matter when you contribute?

    3)  Is it best to contribute on January 1 of the tax year (and then convert on January 2)?
    Click to expand...



    1. No. It will create a non-deductible basis for 2016, but as long as the balance of all pretax IRAs is zero on 12/31 of the year of *conversion*, this should fly. You may consider keeping your non-deductible and deductible traditional balances in separate accounts, though, to facilitate rolling over pretax to 401(k) and converting already-taxed to Roth.

    2. No point in waiting, but the only day that matters is the last of the year of conversion (in this case, 12/31/2017), since that's what shows on form 5498 and is used for figuring taxable amounts for Roth conversions. One does not have to precede the other this year, but I don't think you can do SEP and 401(k) contributions in the same year - check my work on that.

    3. Banks are closed on New Year's Day, lol...but yes, no point in waiting. Contribute the max ($5,500 to each acct, or $6,500 of age 50+) on Jan 2 and do the Roth conversion as soon as the funds clear. It is exceedingly unlikely you'll earn anything in your sweep account in that short period to make anything taxable. "Time in" > "timing" imo. As an aside, choose a custodian that won't close the account when it goes back to zero to keep things easy. Fido and VG both don't close them, and their process takes like 5 min tops.

    Leave a comment:


  • RadMD
    replied




    Two things you need to know:

    1. December 31 is the only day that matters when converting to a Roth IRA via the back door.

    2. There is no tax impact from contributing to a nondeductible TIRA.


    Therefore, go ahead and contribute to your nondeductible TIRAs for 2016, move your pre-tax TIRAs to SOLO-401k’s before 12/31/17, and convert at any point during the year 2017.

    For a long-term game plan, it is best to contribute to your IRA each year as early as possible and convert soon thereafter. I won’t tell you how long to wait. Nobody has anything beyond an opinion on that.
    Click to expand...


    Thank you!

    Leave a comment:


  • KLR
    replied
    That's what I thought so thanks for confirming Johanna!

    Leave a comment:


  • jfoxcpacfp
    replied




    I know this is probably a silly technical question, but next year my husband and I will have to do backdoor Roths (this year we were able to do it directly).  When doing backdoor Roth IRAs, will we both need to open/contribute to individual TIRAs or can we just open one TIRA account and then move $5,500 to each of our Roth IRAs?  In case it’s relevant, we are married filed jointly and in the next two years I plan on becoming a stay at home parent.
    Click to expand...


    You cannot have joint IRAs, just like you cannot have joint 401ks. An IRA is an Individual Retirement Account.

    Leave a comment:


  • jfoxcpacfp
    replied
    Two things you need to know:

    1. December 31 is the only day that matters when converting to a Roth IRA via the back door.

    2. There is no tax impact from contributing to a nondeductible TIRA.


    Therefore, go ahead and contribute to your nondeductible TIRAs for 2016, move your pre-tax TIRAs to SOLO-401k's before 12/31/17, and convert at any point during the year 2017.

    For a long-term game plan, it is best to contribute to your IRA each year as early as possible and convert soon thereafter. I won't tell you how long to wait. Nobody has anything beyond an opinion on that.

    Leave a comment:


  • KLR
    replied
    I know this is probably a silly technical question, but next year my husband and I will have to do backdoor Roths (this year we were able to do it directly).  When doing backdoor Roth IRAs, will we both need to open/contribute to individual TIRAs or can we just open one TIRA account and then move $5,500 to each of our Roth IRAs?  In case it's relevant, we are married filed jointly and in the next two years I plan on becoming a stay at home parent.

    Leave a comment:

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